Pimco’s Kashkari: Markets Pricing in More Easing, Pushing Fed to Act

More investors are embracing the likelihood the Federal Reserve will jolt the economy with monetary-easing measures, but traders will send stocks tanking if they don't get what they want, said Neel Kashkari, managing director at fund giant Pimco.

Since the economic downturn, the Federal Reserve has cut interest rates to near zero and has rolled out measures such as asset purchases from banks that pump liquidity into the economy — a policy tool known as quantitative easing — in an attempt to spur recovery.

Stocks rise when the Fed acts, and investor sentiment is building that lackluster growth, weak demand and dismal employment indicators will prompt the Fed to announce more quantitative easing in the coming weeks.

The Fed will likely comply, because if it doesn't, stock prices will drop to the point the economy may suffer.

"The Fed is in a box right now," Kashkari told CNBC.

Markets are eagerly awaiting the Fed symposium that takes place every year in Jackson Hole, Wyo., where Fed Chairman Ben Bernanke has announced stimulus measures in the past.

"Bernanke's hands appear to be tied and if he doesn't deliver in Jackson Hole, [or] at least give a very positive signal, I think you'll see the risk markets then react and fall back down," he said. "There’s downside risk from here if the Fed doesn’t move.”

Some Fed officials oppose such easing measures since they arguably sow the seeds for inflation down the road.

Since 2008, the Fed has launched two rounds of quantitative easing. A first round of quantitative easing saw the Fed buy $1.7 trillion of mortgage-backed securities from banks just after the downturn, while a second round involved purchases of $600 billion in Treasurys, ending in June 2011.

Some Fed officials feel the need for more easing is now, including Eric Rosengren, president of the Federal Reserve Bank of Boston.

"You continue to do it until it’s clear that you’re no longer treading water,” Rosengren told the New York Times.

“You continue to do it until you have documented evidence that you’re getting growth in income and the unemployment rate consistent with your economic goals.”

Recovery takes priority over all else right now.

“For the last seven months we’ve been treading water. That’s different from what we expected at the beginning of the year,” Rosengren said. “I think it’s time to swim to shore.”